Wednesday, July 22, 2020

Q4 Expectations are Sky-High for Microsoft’s Cloud

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News shaping
the markets today

     

What’s happening: Microsoft Corp is all set to announce its fiscal fourth-quarter results before the opening bell on Wednesday.

What happened: Microsoft’s shares have surged past the $200 mark, taking its market valuation above $1.5 trillion, with investors expecting the company to report strong figures for its latest quarter.

While the software giant has several popular products, the latest results are expected to be driven by its powerful Azure platform due to a rise in enterprise cloud infrastructure spending.

What are expectations: Microsoft is expected to report growth in both revenues and earnings for the fourth quarter.

  • Analysts project revenues to grow 8.4% to $36.55 billion.
  • Earnings are expected to grow 0.7% to $1.38 per share.

Why it matters: Tech giants have been the key beneficiary of the pandemic as companies prepared to support their remote teams amid lockdowns.

The Redmond, Washington-based company’s on-site server products and Microsoft 365 Enterprise have been negatively impacted by the covid-19 outbreak due to widespread layoffs across sectors and countries.

On the other hand, the pandemic has also forced companies to accelerate their digital transformation to support employees working from home. Due to this, Microsoft is likely to have witnessed strong adoption of its Azure platform, driven by rising demand for its Windows Virtual Desktop, Office 365, and Teams.

Microsoft’s growth story in the recent past has been dependent on its Intelligent Cloud unit, which includes the Azure platform. In the fourth quarter of the previous fiscal year, the tech giant had reported 64% growth in revenues from Azure, which resulted in 19% growth in the revenues of the Intelligent Cloud segment to $11.4 billion.

The Intelligent Cloud segment competes directly with market leader and industry behemoth Amazon Web Services. Despite the stiff competition, expectations are high for Microsoft’s Azure platform, which is expected to grow more than 50% in the latest quarter.

Although management is expected to provide conservative guidance for fiscal 2021, Microsoft’s commercial cloud business is expected to be the main driver of revenues and profits over the next few years.

How shares performed recently: Microsoft’s shares have climbed 7% over the past month and hovered around the $200 mark. The stock has gained 32% year to date.

What to watch: Although expectations are high for Azure, investors will be keen to know whether Microsoft has been a net beneficiary of the lockdowns during the June quarter. Markets will also look out for management’s comments on the impact of uncertainty in the macro environment and their guidance for the next fiscal year.

The Markets Today

     

European stocks will be in focus today, after the EU leaders announced a massive coronavirus recovery package.

Context: European markets closed higher on Tuesday after the European Union leaders agreed on a €750 billion covid-19 recovery fund to provide the much-needed support to the economies of the region.

Details: The EU leaders had been in talks to discuss the recovery fund since Friday, but wide disagreement over the amount and composition of the package delayed the announcement. The leaders sorted out their differences to reach a deal to help the bloc recover from the covid-19 crisis.

The pan-European Stoxx 600 closed up 0.3%, after cutting back gains made earlier in the session. However, most sectors closed in positive territory on Tuesday. The German DAX 30 index gained 1%, while the French CAC 40 closed higher by 0.2%.

Wall Street also closed higher on Tuesday following some strong earnings reports, with investors expecting the Fed to announce fresh fiscal stimulus.

Shares of UBS gained around 3% after the company reported better-than-expected profits for the second quarter. Shares of Novartis fell 2% after the Swiss pharma company lowered its 2020 sales forecast and posted a decline in its second-quarter profits and revenues.

Adevinta’s shares surged around 28% on Tuesday after the company announced plans to acquire eBay’s Classifieds division for $9.2 billion.

What to watch: No major economic reports are scheduled to be released for the Eurozone today. So, markets will focus on reports later in the week, including consumer confidence, manufacturing and services PMIs.

Investors will also continue to monitor the coronavirus numbers, with the total cases approaching 15 million globally.

Other Markets: US indices trading closed mixed on Tuesday, with the Dow Jones index and S&P 500 up by 0.6% and 0.17%, respectively. The Nasdaq 100 declined, however, by 0.81%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Canada’s inflation rate as well as the US MBA mortgage applications, house price index, existing home sales and EIA’s crude oil stockpiles.